2013 (8) TMI 447 - AT - Income Tax

Addition u/s. 40A(2)(b) of the Income Tax Act purely on the ground that the assessee has increased remuneration to its Directors - Remuneration of Rs.30,00,000/- considered as taxable under the abovementioned section 40A(2)(b) It is submitted that It is an established fact that if working Directors are paid handsomely then only the company will earn more profit. - Held that - Hon ble Bombay High Court in case of CIT vs. Indo Saudi Services (Travel)(P.) Ltd. (2008 (8) TMI 208 - BOMBAY HIGH COURT) held that Revenue was not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to sister concern since the sister concern was also paying tax at higher rate and held that disallowance of alleged excess commission paid to the sister concern was not justified. - Claim of deduction allowed - Decided in favor of assessee.

Issues Involved:
1. Disallowance of remuneration paid to directors under Section 40A(2)(b) of the Income Tax Act.
2. Comparison of remuneration with market rates and previous year's remuneration.
3. Legitimacy of disallowance based on the increase in company turnover and profits.
4. Tax implications and revenue loss considerations.

Issue-Wise Detailed Analysis:

1. Disallowance of Remuneration Paid to Directors under Section 40A(2)(b):
The primary issue revolves around the disallowance of Rs. 30,00,000/- out of the total Rs. 59,09,560/- remuneration paid to directors, which was considered excessive by the Assessing Officer (A.O.). The A.O. allowed only a 10% increase over the previous year's remuneration, disallowing the remaining amount as excessive under Section 40A(2)(b). The CIT(A) partly upheld this disallowance, confirming Rs. 30,00,000/- and deleting Rs. 29,09,500/-.

2. Comparison of Remuneration with Market Rates and Previous Year's Remuneration:
The A.O. compared the director's remuneration with that of other companies, Patel Salt & Marine Chemical Pvt. Ltd. and Gandhar Salt & Chemical Pvt. Ltd., where directors' salaries remained consistent. However, the CIT(A) noted that the A.O.'s comparison was inadequate as it did not consider the profits of the comparative companies. The CIT(A) observed that the A.O. failed to provide evidence that the directors did not render services or that the remuneration was not justified by market rates.

3. Legitimacy of Disallowance Based on the Increase in Company Turnover and Profits:
The CIT(A) acknowledged that the company's turnover and profits had substantially increased due to the directors' efforts. The turnover increased from Rs. 4.24 crore to Rs. 7.64 crore, and profits from Rs. 1.11 crore to Rs. 2.12 crore. The CIT(A) found it reasonable for the company to share profits with those responsible for the increase. Despite this, the CIT(A) deemed part of the remuneration excessive when strictly compared with market parameters, leading to partial disallowance.

4. Tax Implications and Revenue Loss Considerations:
The appellant argued that both the company and the directors were taxed at the maximum rate, implying no revenue loss to the department. The ITAT cited precedents, including CIT vs. V. S. Dempo & Co. (P.) Ltd. and CIT vs. Indo Saudi Services (Travel)(P.) Ltd., where disallowances were not justified if there was no tax evasion or revenue loss. The ITAT concluded that since both the company and directors were in the same tax bracket, the disallowance was unwarranted.

Conclusion:
The ITAT ruled in favor of the assessee, allowing the appeal and dismissing the Revenue's appeal. The ITAT emphasized that the substantial increase in turnover and profits justified the remuneration paid to directors, and there was no evidence of tax evasion or revenue loss. The ITAT also highlighted the inadequacy of the A.O.'s comparison and the legitimacy of the business needs and benefits derived from the directors' efforts. The decision was pronounced on 08.08.2013.

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